Farming publications

Weekly Economic Commentary

Monday May 11, 2015

The RBA cut the official cash rate to a record low of 2.00% last week, but the accompanying statement was largely silent on future monetary policy guidance. The rate cut itself had been broadly expected by markets and economists and was largely priced into the yield curve before the cut, but the market was left disappointed by the RBA’s failure to signal a clear direction around the prospects of further easings.

Implied cash rate pricing by the futures market

The lack of forward guidance from the RBA last week was interpreted by traders as signalling the end of the rate cut cycle, sending the Australian dollar and bond yields sharply higher. The dollar shot up through USD0.80 and the 10-year government bond yield nudged above 3% to a four-month high. Both the dollar and yields would normally fall after a rate cut.

As shown in the chart above, the pricing of further rate cuts continues to moderate, with the terminal cash rate priced into the inter-bank bill futures market now at 1.88%, up almost 30 basis points since the April RBA meeting.

From last week’s happenings, the market has concluded that the RBA has finished easing, at least for the medium term.

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